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2010-16206

  • FR Doc 2010-16206[Federal Register: July 2, 2010 (Volume 75, Number 127)]

    [Notices]

    [Page 38478-38487]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr02jy10-43]

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    COMMODITY FUTURES TRADING COMMISSION

    Orders Finding That the Mid-C Financial Peak Daily Contract and

    Mid-C Financial Off-Peak Daily Contract, Offered for Trading on the

    IntercontinentalExchange, Inc., Do Not Perform a Significant Price

    Discovery Function

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final orders.

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    SUMMARY: On October 6, 2009, the Commodity Futures Trading Commission

    (``CFTC'' or ``Commission'') published for comment in the Federal

    Register \1\ a notice of its intent to undertake a determination

    whether the Mid-C \2\ Financial Peak Daily (``MPD'') contract and Mid-C

    Financial Off-Peak Daily (``MXO'') contract,\3\ which are listed for

    trading on the IntercontinentalExchange, Inc. (``ICE''), an exempt

    commercial market (``ECM'') under sections 2(h)(3)-(5) of the Commodity

    Exchange Act (``CEA'' or the ``Act''), perform a significant price

    discovery function pursuant to section 2(h)(7) of the CEA. The

    Commission undertook this review based upon an initial evaluation of

    information and data provided by ICE as well as other available

    information. The Commission has reviewed the entire record in this

    matter, including all comments received, and has determined to issue

    orders finding that the MPD and MXO contracts do not perform a

    significant price discovery function. Authority for this action is

    found in section 2(h)(7) of the CEA and Commission rule 36.3(c)

    promulgated thereunder.

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    \1\ 74 FR 51261 (October 6, 2009).

    \2\ The acronym ``Mid-C'' stands for Mid-Columbia.

    \3\ The Federal Register notice also requested comment on the

    Mid-C Financial Peak (``MDC'') contract and Mid-C Financial Off-Peak

    (``OMC'') contract; these contracts will be addressed in a separate

    Federal Register release.

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    DATES: Effective Date: June 25, 2010.

    FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,

    Division of Market Oversight, Commodity Futures Trading

    [[Page 38479]]

    Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,

    DC 20581. Telephone: (202) 418-5515. E-mail: gprice@cftc.gov; or Susan

    Nathan, Senior Special Counsel, Division of Market Oversight, same

    address. Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \4\

    significantly broadened the CFTC's regulatory authority with respect to

    ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory

    category--ECMs on which significant price discovery contracts

    (``SPDCs'') are traded--and treating ECMs in that category as

    registered entities under the CEA.\5\ The legislation authorizes the

    CFTC to designate an agreement, contract or transaction as a SPDC if

    the Commission determines, under criteria established in section

    2(h)(7), that it performs a significant price discovery function. When

    the Commission makes such a determination, the ECM on which the SPDC is

    traded must assume, with respect to that contract, all the

    responsibilities and obligations of a registered entity under the Act

    and Commission regulations, and must comply with nine core principles

    established by new section 2(h)(7)(C).

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    \4\ Incorporated as Title XIII of the Food, Conservation and

    Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

    2008).

    \5\ 7 U.S.C. 1a(29).

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    On March 16, 2009, the CFTC promulgated final rules implementing

    the provisions of the Reauthorization Act.\6\ As relevant here, rule

    36.3 imposes increased information reporting requirements on ECMs to

    assist the Commission in making prompt assessments whether particular

    ECM contracts may be SPDCs. In addition to filing quarterly reports of

    its contracts, an ECM must notify the Commission promptly concerning

    any contract traded in reliance on the exemption in section 2(h)(3) of

    the CEA that averaged five trades per day or more over the most recent

    calendar quarter, and for which the exchange sells its price

    information regarding the contract to market participants or industry

    publications, or whose daily closing or settlement prices on 95 percent

    or more of the days in the most recent quarter were within 2.5 percent

    of the contemporaneously determined closing, settlement or other daily

    price of another contract.

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    \6\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on

    April 22, 2009.

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    Commission rule 36.3(c)(3) established the procedures by which the

    Commission makes and announces its determination whether a particular

    ECM contract serves a significant price discovery function. Under those

    procedures, the Commission will publish notice in the Federal Register

    that it intends to undertake an evaluation whether the specified

    agreement, contract or transaction performs a significant price

    discovery function and to receive written views, data and arguments

    relevant to its determination from the ECM and other interested

    persons. Upon the close of the comment period, the Commission will

    consider, among other things, all relevant information regarding the

    subject contract and issue an order announcing and explaining its

    determination whether or not the contract is a SPDC. The issuance of an

    affirmative order signals the effectiveness of the Commission's

    regulatory authorities over an ECM with respect to a SPDC; at that time

    such an ECM becomes subject to all provisions of the CEA applicable to

    registered entities.\7\ The issuance of such an order also triggers the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4).\8\

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    \7\ Public Law 110-246 at 13203; Joint Explanatory Statement of

    the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d

    Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888,

    75894 (Dec. 12, 2008).

    \8\ For an initial SPDC, ECMs have a grace period of 90 calendar

    days from the issuance of a SPDC determination order to submit a

    written demonstration of compliance with the applicable core

    principles. For subsequent SPDCs, ECMs have a grace period of 30

    calendar days to demonstrate core principle compliance.

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    II. Notice of Intent To Undertake SPDC Determination

    On October 6, 2009, the Commission published in the Federal

    Register notice of its intent to undertake a determination whether the

    MPD and MXO contracts \9\ perform a significant price discovery

    function and requested comment from interested parties.\10\ Comments

    were received from the Federal Energy Regulatory Commission (``FERC''),

    Financial Institutions Energy Group (``FIEG''), Working Group of

    Commercial Energy Firms (``WGCEF''), Edison Electric Institute

    (``EEI''), ICE, Western Power Trading Forum (``WPTF'') and Public

    Utility Commission of Texas (``PUCT'').\11\ The comment letters from

    FERC \12\ and PUCT did not directly address the issue of whether or not

    the subject contracts are SPDCs. The remaining comment letters raised

    substantive issues with respect to the applicability of section 2(h)(7)

    to the MPD and MXO contracts and generally expressed the opinion that

    the contracts are not SPDCs because they does not meet the material

    price reference or material liquidity criteria for SPDC determination.

    These comments are more extensively discussed below, as applicable.

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    \9\ As noted above, the Federal Register notice also requested

    comment on the Mid-C Financial Peak (``MDC'') contract and Mid-C

    Financial Off-Peak (``OMC'') contract. The MDC and OMC contracts

    will be addressed in a separate Federal Register release.

    \10\ The Commission's Part 36 rules establish, among other

    things, procedures by which the Commission makes and announces its

    determination whether a specific ECM contract serves a significant

    price discovery function. Under those procedures, the Commission

    publishes a notice in the Federal Register that it intends to

    undertake a determination whether a specified agreement, contract or

    transaction performs a significant price discovery function and to

    receive written data, views and arguments relevant to its

    determination from the ECM and other interested persons.

    \11\ FERC is an independent federal regulatory agency that,

    among other things, regulates the interstate transmission of natural

    gas, oil and electricity. FIEG describes itself as an association of

    investment and commercial banks who are active participants in

    various sectors of the natural gas markets, ``including acting as

    marketers, lenders, underwriters of debt and equity securities, and

    proprietary investors.'' WGCEF describes itself as ``a diverse group

    of commercial firms in the domestic energy industry whose primary

    business activity is the physical delivery of one or more energy

    commodities to customers, including industrial, commercial and

    residential consumers'' and whose membership consists of ``energy

    producers, marketers and utilities.'' EEI is the ``association of

    shareholder-owned electric companies, international affiliates and

    industry associates worldwide.'' ICE is an ECM, as noted above. WPTF

    describes itself as a ``broad-based membership organization

    dedicated to encouraging competition in the Western power markets *

    * * WTPF strives to reduce the long-run cost of electricity to

    consumers throughout the region while maintaining the current high

    level of system reliability.'' PUCT is the independent organization

    that oversees the Electric Reliability Council of Texas (``ERCOT'')

    to ``ensure nondiscriminatory access to the transmission and

    distribution systems, to ensure the reliability and adequacy of the

    regional electrical network, and to perform other essential market

    functions.'' The comment letters are available on the Commission's

    Web site: http://www.cftc.gov/lawandregulation/federalregister/

    federalregistercomments/2009/09-011.html.

    \12\ FERC expressed the opinion that a determination by the

    Commission that either of the subject contracts performs a

    significant price discovery function ``would not appear to conflict

    with FERC's exclusive jurisdiction under the Federal Power Act (FPA)

    over the transmission or sale for resale of electric energy in

    interstate commerce or with its other regulatory responsibilities

    under the FPA'' and further that ``FERC staff will monitor proposed

    SPDC determinations and advise the CFTC of any potential conflicts

    with FERC's exclusive jurisdiction over RTOs, [(regional

    transmission organizations)], ISOs [(independent system operators)]

    or other jurisdictional entities.''

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    [[Page 38480]]

    III. Section 2(h)(7) of the CEA

    The Commission is directed by section 2(h)(7) of the CEA to

    consider the following criteria in determining a contract's significant

    price discovery function:

    Price Linkage--the extent to which the agreement, contract

    or transaction uses or otherwise relies on a daily or final settlement

    price, or other major price parameter, of a contract or contracts

    listed for trading on or subject to the rules of a designated contract

    market (``DCM'') or derivatives transaction execution facility

    (``DTEF''), or a SPDC traded on an electronic trading facility, to

    value a position, transfer or convert a position, cash or financially

    settle a position, or close out a position.

    Arbitrage--the extent to which the price for the

    agreement, contract or transaction is sufficiently related to the price

    of a contract or contracts listed for trading on or subject to the

    rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of

    an electronic trading facility, so as to permit market participants to

    effectively arbitrage between the markets by simultaneously maintaining

    positions or executing trades in the contracts on a frequent and

    recurring basis.

    Material price reference--the extent to which, on a

    frequent and recurring basis, bids, offers or transactions in a

    commodity are directly based on, or are determined by referencing or

    consulting, the prices generated by agreements, contracts or

    transactions being traded or executed on the electronic trading

    facility.

    Material liquidity--the extent to which the volume of

    agreements, contracts or transactions in a commodity being traded on

    the electronic trading facility is sufficient to have a material effect

    on other agreements, contracts or transactions listed for trading on or

    subject to the rules of a DCM, DTEF or electronic trading facility

    operating in reliance on the exemption in section 2(h)(3).

    Not all criteria must be present to support a determination that a

    particular contract performs a significant price discovery function,

    and one or more criteria may be inapplicable to a particular

    contract.\13\ Moreover, the statutory language neither prioritizes the

    criteria nor specifies the degree to which a SPDC must conform to the

    various criteria. In Guidance issued in connection with the Part 36

    rules governing ECMs with SPDCs, the Commission observed that these

    criteria do not lend themselves to a mechanical checklist or formulaic

    analysis. Accordingly, the Commission has indicated that in making its

    determinations it will consider the circumstances under which the

    presence of a particular criterion, or combination of criteria, would

    be sufficient to support a SPDC determination.\14\ For example, for

    contracts that are linked to other contracts or that may be arbitraged

    with other contracts, the Commission will consider whether the price of

    the potential SPDC moves in such harmony with the other contract that

    the two markets essentially become interchangeable. This co-movement of

    prices would be an indication that activity in the contract had reached

    a level sufficient for the contract to perform a significant price

    discovery function. In evaluating a contract's price discovery role as

    a price reference, the Commission the extent to which, on a frequent

    and recurring basis, bids, offers or transactions are directly based

    on, or are determined by referencing, the prices established for the

    contract.

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    \13\ In its October 6, 2009, Federal Register release, the

    Commission identified material price reference and material

    liquidity as the possible criteria for SPDC determination of the MPD

    and MXO contracts. Arbitrage and price linkage were not identified

    as possible criteria. As a result, arbitrage and price linkage will

    not be discussed further in this document and the associated Orders.

    \14\ 17 CFR 36, Appendix A.

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    IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the MPD

    and MXO contracts are discussed separately below:

    a. The Mid-C Financial Peak Daily (MPD) Contract and the SPDC Indicia

    The MPD contract is cash settled based on the peak, day-ahead price

    index for the specified day, as published by ICE in its ``ICE Day Ahead

    Power Price Report,'' which is available on the ECM's Web site. The

    daily peak-hour electricity price index is a volume-weighted average of

    qualifying, day-ahead, peak-hour power transactions at the Mid-Columbia

    hub that are traded on the ICE platform from 6 a.m. to 11 a.m. CST on

    the publication date. The ICE transactions on which the price index is

    based specify the physical delivery of power. The size of the MPD

    contract is 400 megawatt hours (``MWh''), and the MPD contract is

    listed for 38 consecutive days.

    As the Columbia River flows through Washington State, it encounters

    two federal and nine privately-owned hydroelectric dams generating a

    total of close to 20,000 MW of power in the Northwest.\15\ With another

    three dams in British Columbia, Canada, and many more on its various

    tributaries, the Columbia River is the largest power-producing river in

    North America. A major goal of the participants in the Mid-C

    electricity market is to maximize the Columbia River's potential, along

    with protecting and enhancing the non-power uses of the river. The

    reliability of the electricity grid in the Northwest is coordinated by

    the Northwest PowerPool (``NWPP''), which is a voluntary organization

    comprised of major generating utilities serving the Northwestern United

    States, as well as British Columbia and Alberta, Canada.

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    \15\ http://www.wpuda.org/publications/connections/hydro/

    River%20Riders.pdf.

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    One stretch of the Columbia River between the Grand Coulee Dam and

    Priests Rapids Dam is governed by the Mid-Columbia Hourly Coordination

    Agreement (``MCHCA''). The MCHCA covers seven dams \16\ and nearly

    13,000 MW of generation. Specifically, the agreement defines how the

    Chelan, Douglas and Grant PUDs coordinate operations with the

    Bonneville Power Administration to maximize power generation while

    reducing fluctuations in the river's flow. A number of other utilities

    that buy power from the PUDs have also signed onto the agreement. This

    agreement was signed into effect in 1972 and renewed for 20 years in

    1997.\17\

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    \16\ The federal dams are Grand Coulee and Chief Joseph. The

    remaining dams are Wells (operated by the Douglas PUD), Rocky Reach

    and Rock Island (operated by the Chelan PUD), and Wanapum and Priest

    Rapids (operated by the Grant PUD). The term ``PUD'' stands for

    publically-owned utility, which provides essential services within a

    specified area.

    \17\ http://www.wpuda.org/publications/connections/hydro/

    River%20Riders.pdf.

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    In general, electricity is bought and sold in an auction setting on

    an hourly basis at various points along the electrical grid. The price

    of electricity at a particular point on the grid is called the

    locational marginal price (``LMP''), which includes the costs of

    producing the electricity, as well as congestion and line losses. Thus,

    an LMP reflects generation costs as well as the actual cost of

    supplying and delivering electricity to a specific point on the grid.

    Electricity is traded in a day-ahead market as well as a real-time

    market. Typically, the bulk of energy transactions occur in the day-

    ahead market. The day-ahead market establishes prices for electricity

    that is to be delivered during the specified hour on the following day.

    Day-ahead prices are determined based on generation and energy

    transaction quotes offered in advance. Because day-

    [[Page 38481]]

    ahead quotes for power are based on estimates of supply and demand,

    electricity needs usually are not perfectly satisfied in the day-ahead

    market. In this regard, on the day the electricity is transmitted and

    used, auction participants typically realize that they bought or sold

    too much power or too little power. A real-time auction is operated to

    alleviate this problem by servicing as a balancing mechanism.

    Specifically, electricity traders use the real-time market to sell

    excess electricity and buy additional power to meet demand. Only a

    relatively small amount of electricity is traded in the real-time

    market compared with the day-ahead market.

    1. Material Price Reference Criterion

    The Commission's October 6, 2009, Federal Register notice

    identified material price reference and material liquidity as the

    potential basis for a SPDC determination with respect to the MPD

    contract. The Commission considered the fact that ICE sells its price

    data to market participants in a number of different packages which

    vary in terms of the hubs covered, time periods, and whether the data

    are daily only or historical. For example, ICE offers the ``West Power

    of Day'' package with access to all price data or just current prices

    plus a selected number of months (i.e., 12, 24, 36 or 48 months) of

    historical data. This package includes price data for the MPD contract.

    The Commission also noted that its October 2007 Report on the

    Oversight of Trading on Regulated Futures Exchanges and Exempt

    Commercial Markets (``ECM Study'') found that in general, market

    participants view ICE as a price discovery market for certain

    electricity contracts. The study did not specify which markets

    performed this function; nevertheless, the Commission determined that

    the MPD contract, while not mentioned by name in the ECM Study, might

    warrant further review.

    The Commission explains in its Guidance to the Part 36 rules that

    in evaluating a contract under the material price reference criterion,

    it will rely on one of two sources of evidence--direct or indirect--to

    determine that the price of a contract was being used as a material

    price reference and therefore, serving a significant price discovery

    function.\18\ With respect to direct evidence, the Commission will

    consider the extent to which, on a frequent and recurring basis, cash

    market bids, offers or transactions are directly based on or quoted at

    a differential to, the prices generated on the ECM in question. Direct

    evidence may be established when cash market participants are quoting

    bid or offer prices or entering into transactions at prices that are

    set either explicitly or implicitly at a differential to prices

    established for the contract in question. Cash market prices are set

    explicitly at a differential to the section 2(h)(3) contract when, for

    instance, they are quoted in dollars and cents above or below the

    reference contract's price. Cash market prices are set implicitly at a

    differential to a section 2(h)(3) contract when, for instance, they are

    arrived at after adding to, or subtracting from the section 2(h)(3)

    contract, but then quoted or reported at a flat price. With respect to

    indirect evidence, the Commission will consider the extent to which the

    price of the contract in question is being routinely disseminated in

    widely distributed industry publications--or offered by the ECM itself

    for some form of remuneration--and consulted on a frequent and

    recurring basis by industry participants in pricing cash market

    transactions.

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    \18\ 17 CFR 36, Appendix A.

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    The Mid-C power market is a major pricing center for electricity on

    the West Coast. Traders, including producers, keep abreast of the

    electricity prices in the Mid-C power market when conducting cash

    deals. However, ICE's Mid-C Financial Peak (``MDC'') contract, which is

    a monthly contract, is used more widely as a source of pricing

    information for electricity than the daily, peak-hour contract (i.e.,

    the MPD contract). Specifically, the MDC contract prices power at the

    Mid-C trading point based on the simple average of the daily peak-hour

    prices over the entire month, as reported by ICE. Moreover, the MDC

    contract is listed for up to 86 calendar months. Thus, market

    participants can use the MDC contract to lock-in electricity prices far

    into the future. In contrast, the MPD contract is listed for a much

    shorter length of time--up to 38 days in the future. With such a

    limited timeframe, the forward pricing capability of the MPD contract

    is much more constrained than that of the MDC contract. Traders use

    monthly power contracts like the MDC contract to price electricity

    commitments in the future, where such commitments are based on long

    range forecasts of power supply and demand. As actual generation and

    usage nears, market participants have a better understanding of actual

    power supply and needs. As a result, traders can modify previously-

    established hedges with the daily power contracts, like the MPD

    contract.

    The Commission explained in its Guidance that a contract meeting

    the material price reference criterion would routinely be consulted by

    industry participants in pricing cash market transactions. Although the

    Mid-C is a major trading center for electricity and, as noted, ICE

    sells price information for the MPD contract, the MPD contract is not

    consulted in this manner and does not satisfy the material price

    reference criterion. Thus, the MPD contract does not satisfy the direct

    price reference test for existence of material price reference.

    Furthermore, the Commission notes that publication of the MPD

    contract's prices is not indirect evidence of material price reference.

    The MPD contract's prices are published with those of numerous other

    contracts, including ICE's monthly electricity contracts, which are of

    more interest to market participants. In these circumstances, the

    Commission has concluded that traders likely do not specifically

    purchase ICE data packages for the MPD contract's prices and do not

    consult such prices on a frequent and recurring basis in pricing cash

    market transactions.

    i. Federal Register Comments:

    WGCEF, WPTF, EEI and ICE stated that no other contract directly

    references or settles to the MPD contract's price. Moreover, the

    commenters argued that the underlying cash price series against which

    the MPD contract is settled (in this case, the peak Mid-C electricity

    price on a particular day, which is derived from cash market

    transactions) is the authentic reference price and not the ICE contract

    itself. Commission staff believes that this interpretation of price

    reference is too narrow and believes that a cash-settled derivatives

    contract could meet the price reference criterion if market

    participants ``consult on a frequent and recurring basis'' the

    derivatives contract when pricing forward, fixed-price commitments or

    other cash-settled derivatives that seek to ``lock in'' a fixed price

    for some future point in time to hedge against adverse price movements.

    As noted above, while the Mid-C is a major power market, traders do not

    consider the daily peak-hour Mid-C price to be as important as the

    electricity price associated with the monthly contract.

    In addition, WGCEF stated that the publication of price data for

    the MPD contract price is weak justification for material price

    reference. This commenter argued that market participants generally do

    not purchase ICE data sets for one contract's prices, such as those for

    the MPD contract. Instead, traders are interested in the settlement

    prices, so the fact that ICE sells the MPD prices as part of a broad

    package is not conclusive evidence that market participants are buying

    the ICE

    [[Page 38482]]

    data sets because they find the MPD prices have substantial value to

    them. As noted above, the Commission notes that publication of the MPD

    contract's prices is not indirect evidence of routine dissemination.

    The MPD contract's prices are published with those of numerous other

    contracts, which are of more interest to market participants. Due to

    the lack of importance of daily power contracts relative to monthly

    contracts, the Commission has concluded that traders likely do not

    specifically purchase the ICE data packages for the MPD contract's

    prices and do not consult such prices on a frequent and recurring basis

    in pricing cash market transactions.

    Lastly, EEI criticized that the ECM Study did not specifically

    identify the MPD contract as a contract that is referred to by market

    participants on a frequent and recurring basis. In response, the

    Commission notes that it cited the ECM Study's general finding that

    some ICE electricity contracts appear to be regarded as price discovery

    markets merely as indication that an investigation of certain ICE

    contracts may be warranted. The ECM Study was not intended to serve as

    the sole basis for determining whether or not a particular contract

    meets the material price reference criterion.

    ii. Conclusion Regarding Material Price Reference

    Based on the above, the Commission finds that the ICE MPD contract

    does not meet the material price reference criterion because cash

    market transactions are not priced either explicitly or implicitly on a

    frequent and recurring basis at a differential to the MPD contract's

    price (direct evidence). Moreover, while the MPD contract's price data

    is sold to market participants, those individuals likely do not

    purchase the ICE data packages specifically for the MPD contract's

    prices and do not consult such prices on a frequent and recurring basis

    in pricing cash market transactions (indirect evidence).

    2. Material Liquidity Criterion

    As noted above, in its October 6, 2009, Federal Register notice,

    the Commission identified material price reference and material

    liquidity as potential criteria for SPDC determination of the MPD

    contract. To assess whether a contract meets the material liquidity

    criterion, the Commission first examines trading activity as a general

    measurement of the contract's size and potential importance. If the

    Commission finds that the contract in question meets a threshold of

    trading activity that would render it of potential importance, the

    Commission will then perform a statistical analysis to measure the

    effect that changes to the subject contract's prices potentially may

    have on prices for other contracts listed on an ECM or a DCM.

    The total number of transactions executed on ICE's electronic

    platform in the MPD contract was 1,294 in the second quarter of 2009,

    resulting in a daily average of 20.2 trades. During the same period,

    the MPD contract had a total trading volume of 18,862 contracts and an

    average daily trading volume of 294.7 contracts. Moreover, open

    interest as of June 30, 2009, was 826 contracts, which included trades

    executed on ICE's electronic trading platform, as well as trades

    executed off of ICE's electronic trading platform and then brought to

    ICE for clearing. In this regard, ICE does not differentiate between

    open interest created by a transaction executed on its trading platform

    and that created by a transaction executed off its trading

    platform.\19\

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    \19\ 74 FR 51261 (October 6, 2009).

    ---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that

    total trading volume in the fourth quarter of 2009 was 19,574 contracts

    (or 301 contracts on a daily basis). In terms of number of

    transactions, 1,108 trades occurred in the fourth quarter of 2009 (17

    trades per day). As of December 31, 2009, open interest in the MPD

    contract was 550 contracts, which included trades executed on ICE's

    electronic trading platform, as well as trades executed off of ICE's

    electronic trading platform and then brought to ICE for clearing.

    The number of trades per day remained relatively low between the

    second and fourth quarters of 2009 and averaged only slightly more than

    the reporting level of five trades per day. Moreover, trading activity

    in the MPD contract, as characterized by total quarterly volume,

    indicates that the MPD contract experiences trading activity that is

    similar to that of minor futures markets.\20\ Thus, the MPD contract

    does not meet a threshold of trading activity that would render it of

    potential importance and no additional statistical analysis is

    warranted.\21\

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    \20\ Staff has advised the Commission that in its experience, a

    thinly-traded contract is, generally, one that has a quarterly

    trading volume of 100,000 contracts or less. In this regard, in the

    third quarter of 2009, physical commodity futures contracts with

    trading volume of 100,000 contracts or fewer constituted less than

    one percent of total trading volume of all physical commodity

    futures contracts.

    \21\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is a SPDC, the Commission made clear that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC],* * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' [17 CFR 36, Appendix A]. For the

    reasons discussed above, the Commission has found that the MPD

    contract does not meet the material price reference criterion. In

    light of this finding and the Commission's Guidance cited above,

    there is no need to evaluate further the material liquidity criteria

    since the Commission believes it is not useful as the sole basis for

    a SPDC determination.

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    i. Federal Register Comments

    ICE and WGCEF stated that the MPD contract lacks a sufficient

    number of trades to meet the material liquidity criterion. These two

    commenters, along with WPTF, FEIG and EEI argued that the MPD contract

    cannot have a material effect on other contracts, such as those listed

    for trading by the New York Mercantile Exchange (``NYMEX''), a DCM. The

    commenters pointed out that it is not possible for the MPD contract to

    affect a DCM contract because price linkage and the potential for

    arbitrage do not exist. The DCM contracts do not cash settle to the MPD

    contract's price. Instead, the DCM contracts and the MPD contract are

    both cash settled based on physical transactions, which neither the ECM

    or the DCM contracts can influence.

    WGCEF and ICE noted that the Commission's Guidance had posited

    concepts of liquidity that generally assumed a fairly constant stream

    of prices throughout the trading day and noted that the relatively low

    number of trades per day in the MPD contract did not meet this standard

    of liquidity. The Commission observes that a continuous stream of

    prices would indeed be an indication of liquidity for certain markets

    but the Guidance also notes that ``quantifying the levels of immediacy

    and price concession that would define material liquidity may differ

    from one market or commodity to another.'' \22\

    ---------------------------------------------------------------------------

    \22\ Guidance, supra.

    ---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade

    per day test for material liquidity.'' To the contrary, the Commission

    adopted a five trades-per-day threshold as a reporting requirement to

    enable it to ``independently be aware of ECM contracts that may develop

    into SPDCs'' \23\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC; however, the contract will not be found to be a

    [[Page 38483]]

    SPDC merely because it met the reporting threshold.

    ---------------------------------------------------------------------------

    \23\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ICE proposed that the statistics provided by ICE were

    misinterpreted and misapplied by the Commission. In particular, ICE

    stated that the volume figures used in the Commission's analysis (cited

    above) ``include trades made in all months'' as well as in strips of

    contract months. ICE suggested that a more appropriate method of

    determining liquidity is to examine the activity in a single traded

    month of a given contract.'' \24\ It is the Commission's opinion that

    liquidity, as it pertains to the MPD contract, is typically a function

    of trading activity in particular lead days and, given sufficient

    liquidity in such days, the ICE MPD contract itself would be considered

    liquid. In any event, in light of the fact that the Commission has

    found that the MPD contract does not meet the material price reference

    criterion, according to the Commission's Guidance, it would be

    unnecessary to evaluate whether the MPD contract meets the material

    liquidity criterion since it cannot be used alone for SPDC

    determination.

    ---------------------------------------------------------------------------

    \24\ In addition, ICE stated that the trades-per-day statistics

    that it provided to the Commission in its quarterly filing and which

    were cited in the Commission's October 6, 2009, Federal Register

    notice includes 2(h)(1) transactions, which were not completed on

    the electronic trading platform and should not be considered in the

    SPDC determination process. The Commission staff asked ICE to review

    the data it sent in its quarterly filings; ICE confirmed that the

    volume data it provided and which the Commission cited includes only

    transaction data executed on ICE's electronic trading platform. As

    noted above, supplemental data supplied by ICE confirmed that block

    trades are in addition to the trades that were conducted on the

    electronic platform; block trades comprise about 28 percent (fourth

    quarter of 2009) of all transactions in the MPD contract. Commission

    acknowledges that the open interest information it provided in its

    October 6, 2009, Federal Register notice includes transactions made

    off the ICE platform. However, once open interest is created, there

    is no way for ICE to differentiate between ``on-exchange'' versus

    ``off-exchange'' created positions, and all such positions are

    fungible with one another and may be offset in any way agreeable to

    the position holder regardless of how the position was initially

    created.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    For the reasons discussed above, the Commission finds that the MPD

    contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the MPD Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE MPD

    contract does not perform a significant price discovery function under

    the criteria established in section 2(h)(7) of the CEA. Specifically,

    the Commission has determined that the MPD contract does not meet the

    material price reference or material liquidity criteria at this time.

    Accordingly, the Commission is issuing the attached Order declaring

    that the MPD contract is not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard ICE as a registered entity in connection with its MPD

    contract.\25\ Accordingly, with respect to its MPD contract, ICE is not

    required to comply with the obligations, requirements and timetables

    prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,

    ICE must continue to comply with the applicable reporting requirements

    for ECMs.

    ---------------------------------------------------------------------------

    \25\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    b. The Mid-C Financial Off-Peak Daily (MXO) Contract and the SPDC

    Indicia

    The MXO contract is cash settled based on the off-peak, day-ahead

    price index for the specified day, as published by ICE in its ``ICE Day

    Ahead Power Price Report,'' which is available on the ECM's website.

    The daily, off-peak hour electricity price index is a volume-weighted

    average of qualifying, day-ahead, off-peak hour power transactions at

    the Mid-Columbia hub that are traded on the ICE platform from 6 a.m. to

    11a.m. CST on the publication date. The ICE transactions on which the

    price index is based specify the physical delivery of power. The size

    of the MXO contract is 25 MWh, and the MXO contract is listed for 70

    consecutive days.

    As the Columbia River flows through Washington State, it encounters

    two federal and nine privately-owned hydroelectric dams generating

    close to 20,000 MW of power for the Northwest.\26\ With another three

    dams in British Columbia, Canada, and many more on its various

    tributaries, the Columbia River is the largest power-producing river in

    North America. A major goal of the participants in the Mid-C

    electricity market is to maximize the Columbia River's potential, along

    with protecting and enhancing the non-power uses of the river. The

    reliability of the electricity grid in the Northwest is coordinated by

    the NWPP.

    ---------------------------------------------------------------------------

    \26\ http://www.wpuda.org/publications/connections/hydro/

    River%20Riders.pdf.

    ---------------------------------------------------------------------------

    One stretch of the Columbia River between the Grand Coulee Dam and

    Priests Rapids Dam is governed by the MCHCA. The MCHCA covers seven

    dams \27\ and nearly 13,000 MW of generation. Specifically, the

    agreement defines how the Chelan, Douglas and Grant PUDs coordinate

    operations with the Bonneville Power Administration to maximize power

    generation while reducing fluctuations in the river's flow. A number of

    other utilities that buy power from the PUDs have also signed onto the

    agreement. This agreement was signed into effect on 1972 and renewed

    for 20 years in 1997.\28\

    ---------------------------------------------------------------------------

    \27\ The federal dams are Grand Coulee and Chief Joseph. The

    remaining dams are Wells (operated by the Douglas PUD), Rocky Reach

    and Rock Island (operated by the Chelan PUD), and Wanapum and Priest

    Rapids (operated the Grant PUD).

    \28\ http://www.wpuda.org/publications/connections/hydro/

    River%20Riders.pdf.

    ---------------------------------------------------------------------------

    In general, electricity is bought and sold in an auction setting on

    an hourly basis at various point along the electrical grid. The price

    of electricity at a particular point on the grid is called the LMP,

    which includes the cost of producing the electricity, as well as

    congestion and line losses. Thus, and LMP reflects generation costs as

    well as the actual cost of supplying and delivering electricity to a

    specific point on the grid.

    Electricity is traded in a day-ahead market as well as a real-time

    market. Typically, the bulk of the energy transactions occur in the

    day-ahead market. The day-ahead market establishes prices for

    electricity that is to be delivered during the specified hour on the

    following day. Day-ahead prices are determined based on generation and

    energy transaction quotes offered in advance. Because day-ahead price

    quotes are based on estimates of supply and demand, electricity needs

    usually are not perfectly satisfied in the day-ahead market. On the day

    electricity is generated and used, auction participants usually realize

    that they bought or sold either too much or too little power. A real-

    time auction is operated in the Mid-C market to alleviate this problem.

    In this regard, electricity traders use the real-time market to sell

    excess electricity and buy additional power to meet demand. Only a

    relatively small amount of electricity is traded in the real-time

    market compared with the day-ahead market.

    1. Material Price Reference Criterion

    The Commission's October 6, 2009, Federal Register notice

    identified material price reference and material liquidity as the

    potential basis for a SPDC determination with respect to the MXO

    contract. The Commission considered the fact that ICE sells its price

    data to market participants in a number of different packages which

    vary in terms of the hubs covered, time periods, and whether the data

    are daily

    [[Page 38484]]

    only or historical. For example, ICE offers the ``West Power of Day''

    package with access to all price data or just current prices plus a

    selected number of months (i.e., 12, 24, 36 or 48 months) of historical

    data. This package includes price data for the MXO contract.

    The Commission also noted that its October 2007 ECM Study found

    that, in general, market participants view ICE as a price discovery

    market for certain electricity contracts. The study did not specify

    which markets performed this function; nevertheless, the Commission

    determined that the MXO contract, while not mentioned by name in the

    ECM Study, might warrant further analysis.

    The Commission has explained in Guidance that it will rely on one

    of two sources of evidence--direct or indirect--to determine that the

    price of a contract is being used as a material price reference and

    therefore, serving a significant price discovery function.\29\ With

    respect to direct evidence, the Commission will consider the extent to

    which, on a frequent and recurring basis, cash market bids, offers or

    transactions are directly based on or quoted at a differential to, the

    prices generated on the ECM in question. Direct evidence may be

    established when cash market participants are quoting bid or offer

    prices or entering into transactions at prices that are set either

    explicitly or implicitly at a differential to prices established for

    the contract in question. Cash market prices are set explicitly at a

    differential to the section 2(h)(3) contract when, for instance, they

    are quoted in dollars and cents above or below the reference contract's

    price. Cash market prices are set implicitly at a differential to a

    section 2(h)(3) contract when, for instance, they are arrived at after

    adding to, or subtracting from the section 2(h)(3) contract, but then

    quoted or reported at a flat price. With respect to indirect evidence,

    the Commission will consider the extent to which the price of the

    contract in question is being routinely disseminated in widely

    distributed industry publications--or offered by the ECM itself for

    some form of remuneration--and consulted on a frequent and recurring

    basis by industry participants in pricing cash market transactions.

    ---------------------------------------------------------------------------

    \29\ 17 CFR 36, Appendix A.

    ---------------------------------------------------------------------------

    The Mid-C power market is a major pricing center for electricity on

    the West Coast. Traders, including producers, keep abreast of the

    electricity prices in the Mid-C power market when conducting cash

    deals. However, ICE's Mid-C Financial Off-Peak (``OMC'') contract,

    which is a monthly contract, is used more widely as a source of pricing

    information for electricity in that market than the daily off-peak hour

    contract (i.e., the MXO contract). In this regard, OMC contract prices

    power at the Mid-C trading point based on the simple average of the

    daily off-peak hour prices over the entire month, as reported by ICE.

    Moreover, the OMC contract is listed for up to 86 calendar months.

    Market participants can use the OMC contract to lock-in off-peak

    electricity prices far into the future. In contrast, the MXO contract

    is listed for a much shorter length of time--up to 70 days in the

    future. With such a limited timeframe, the forward pricing capability

    of the MXO contract is constrained relative to that of the OMC

    contract. Traders likely use monthly power contracts like the OMC

    contract to price electricity commitments in the future. Such

    commitments are based on long range forecasts of power supply and

    demand. As the time of generation and consumption nears, market

    participants have a better understanding of actual power supply and

    needs. As a result, traders can modify previously-established hedges

    with the daily power contracts, like the MXO contract.

    The Commission explained in its Guidance that a contract meeting

    the material price reference criterion would routinely be consulted by

    industry participants in pricing cash market transactions. Although the

    Mid-C is a major trading center for electricity and, as noted, ICE

    sells price information for the MXO contract, the Commission found upon

    further evaluation that the MXO contract is not routinely consulted by

    industry participants in pricing cash market transactions. Furthermore,

    the Commission notes that publication of the MXO contract's prices is

    not indirect evidence of material price reference. The MXO contract's

    prices are published with those of numerous other contracts, including

    ICE's OMC contract, which are of more interest to market participants.

    Thus, the Commission has concluded that traders likely do not

    specifically purchase ICE data packages for the MXO contract's prices

    and do not consult such prices on a frequent and recurring basis in

    pricing cash market transactions.

    i. Federal Register Comments

    WGCEF, WPTF, EEI and ICE stated that no other contract directly

    references or settles to the MXO contract's price. Moreover, the

    commenters argued that the underlying cash price series against which

    the MXO contract is settled (in this case, the off-peak Mid-C

    electricity price on a particular day, which is derived from cash

    market transactions) is the authentic reference price and not the ICE

    contract itself. Commission staff believes that this interpretation of

    price reference is too limiting and believes that a cash-settled

    derivatives contract could meet the price reference criterion if market

    participants ``consult on a frequent and recurring basis'' the

    derivatives contract when pricing forward, fixed-price commitments or

    other cash-settled derivatives that seek to ``lock in'' a fixed price

    for some future point in time to hedge against adverse price movements.

    As noted above, while the Mid-C is a major power market, traders do not

    consider the daily off-peak hour Mid-C price to be as important as the

    electricity price associated with the average monthly off-peak price.

    In addition, WGCEF stated that the publication of price data for

    the MXO contract price reference is weak justification for material

    price reference. This commenter argued that market participants

    generally do not purchase ICE data sets for one contract's prices, such

    as those for the MXO contract. Instead, traders are interested in the

    settlement prices, so the fact that ICE sells the MXO prices as part of

    a broad package is not conclusive evidence that market participants are

    buying the ICE data sets because they find the MXO prices have

    substantial value to them. As mentioned above, the Commission notes

    that publication of the MXO contract's prices is not indirect evidence

    of routine dissemination. The MXO contract's prices are published with

    those of numerous other contracts, which are of more interest to market

    participants. Due to the lack of importance of daily power contracts

    relative to monthly power contracts, the Commission has concluded that

    traders likely do not specifically purchase the ICE data packages for

    the MXO contract's prices and do not consult such prices on a frequent

    and recurring basis in pricing cash market transactions.

    Lastly, EEI observed that the ECM Study did not specifically

    identify the MXO contract as a contract that is referred to by market

    participants on a frequent and recurring basis. In response, the

    Commission notes that it cited the ECM Study's general finding that

    some ICE electricity contracts appear to be regarded as price discovery

    markets merely as indication that an investigation of certain ICE

    contracts may be warranted. The ECM Study was not intended to serve as

    the sole basis for determining whether or not a particular contract

    meets the material price reference criterion.

    [[Page 38485]]

    ii. Conclusion Regarding Material Price Reference:

    Based on the above, the Commission finds that the ICE MXO contract

    does not meet the material price reference criterion because cash

    market transactions are not priced either explicitly or implicitly on a

    frequent and recurring basis at a differential to the MXO contract's

    price (direct evidence). Moreover, while the MXO contract's price data

    is sold to market participants, those individuals likely do not

    specifically purchase the ICE data packages for the MXO contract's

    prices and do not consult such prices on a frequent and recurring basis

    in pricing cash market transactions (indirect evidence).

    2. Material Liquidity Criterion

    As noted above, in its October 6, 2009, Federal Register notice,

    the Commission identified material price reference and material

    liquidity as potential criteria for SPDC determination of the MXO

    contract. To assess whether a contract meets the material liquidity

    criterion, the Commission first examines trading activity as a general

    measurement of the contract's size and potential importance. If the

    Commission finds that the contract in question meets a threshold of

    trading activity that would render it of potential importance, the

    Commission will then perform a statistical analysis to measure the

    effect that changes to the subject contract's prices potentially may

    have on prices for other contracts listed on an ECM or a DCM.

    The total number of transactions executed on ICE's electronic

    platform in the MXO contract was 437 in the second quarter of 2009,

    resulting in a daily average of 6.8 trades. During the same period, the

    MXO contract had a total trading volume of 61,688 contracts and an

    average daily trading volume of 963.9 contracts. Moreover, open

    interest as of June 30, 2009, was 826 contracts, which included trades

    executed on ICE's electronic trading platform, as well as trades

    executed off of ICE's electronic trading platform and then brought to

    ICE for clearing. In this regard, ICE does not differentiate between

    open interest created by a transaction executed on its trading platform

    and that created by a transaction executed off its trading

    platform.\30\

    ---------------------------------------------------------------------------

    \30\ 74 FR 51261 (October 6, 2009).

    ---------------------------------------------------------------------------

    In a subsequent filing dated March 24, 2010, ICE reported that

    total trading volume in the fourth quarter of 2009 was 19,216 contracts

    (or 296 contracts on a daily basis). In terms of number of

    transactions, 123 trades occurred in the fourth quarter of 2009 (1.9

    trades per day). As of December 31, 2009, open interest in the MXO

    contract was 2,528 contracts, which included trades executed on ICE's

    electronic trading platform, as well as trades executed off of ICE's

    electronic trading platform and then brought to ICE for clearing.

    The number of trades per day fell below minimum reporting level of

    five trades per day in the fourth quarters of 2009. Moreover, trading

    activity in the MXO contract, as characterized by total quarterly

    volume, indicates that the MXO contract experiences trading activity

    that is similar to that of minor futures markets.\31\ Thus, the MXO

    contract does not meet a threshold of trading activity that would

    render it of potential importance and no additional statistical

    analysis is warranted.\32\

    ---------------------------------------------------------------------------

    \31\ Staff has advised the Commission that in its experience, a

    thinly-traded contract is, generally, one that has a quarterly

    trading volume of 100,000 contracts or less. In this regard, in the

    third quarter of 2009, physical commodity futures contracts with

    trading volume of 100,000 contracts or fewer constituted less than

    one percent of total trading volume of all physical commodity

    futures contracts.

    \32\ In establishing guidance to illustrate how it will evaluate

    the various criteria, or combinations of criteria, when determining

    whether a contract is a SPDC, the Commission observed that

    ``material liquidity itself would not be sufficient to make a

    determination that a contract is a [SPDC], * * * but combined with

    other factors it can serve as a guidepost indicating which contracts

    are functioning as [SPDCs].'' For the reasons discussed above, the

    Commission has found that the MXO contract does not meet the

    material price reference criterion. In light of this finding and the

    Commission's Guidance cited above, there is no need to evaluate

    further the material liquidity criteria since the Commission

    believes it is not useful as the sole basis for a SPDC

    determination.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    ICE and WGCEF stated that the MXO contract lacks a sufficient

    number of trades to meet the material liquidity criterion. These two

    commenters, along with WPTF, FEIG and EEI argued that the MXO contract

    cannot have a material effect on other contracts, such as those listed

    for trading by NYMEX. The commenters pointed out that it is not

    possible for the MXO contract to affect a DCM contract because price

    linkage and the potential for arbitrage do not exist. The DCM contracts

    do not cash settle to the MXO contract's price. Moreover, the DCM

    contracts and the MXO contract are both cash settled based on physical

    transactions, which the contracts cannot influence.

    WGCEF and ICE noted that the Commission's Guidance had posited

    concepts of liquidity that generally assumed a fairly constant stream

    of prices throughout the trading day and noted that the relatively low

    number of trades per day in the MXO contract did not meet this standard

    of liquidity. The Commission observes that a continuous stream of

    prices would indeed be an indication of liquidity for certain markets

    but the Guidance also notes that ``quantifying the levels of immediacy

    and price concession that would define material liquidity may differ

    from one market or commodity to another.'' \33\

    ---------------------------------------------------------------------------

    \33\ Guidance, supra.

    ---------------------------------------------------------------------------

    ICE opined that the Commission ``seems to have adopted a five trade

    per day test for material liquidity.'' To the contrary, the Commission

    adopted a five trades-per-day threshold as a reporting requirement to

    enable it to ``independently be aware of ECM contracts that may develop

    into SPDCs''\34\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC; however, the contract will not be found to be a SPDC merely

    because it met the reporting threshold.

    ---------------------------------------------------------------------------

    \34\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ICE proposed that the statistics provided by ICE were

    misinterpreted and misapplied by the Commission. In particular, ICE

    stated that the volume figures used in the Commission's analysis (cited

    above) ``include trades made in all months'' as well as in strips of

    contract months. ICE suggested that a more appropriate method of

    determining liquidity is to examine the activity in a single traded

    month of a given contract.\35\ It is the Commission's opinion that

    liquidity, as it pertains to the MXO contract, is typically a function

    of trading activity in particular lead days and, given sufficient

    liquidity

    [[Page 38486]]

    in such days, the ICE MXO contract itself would be considered liquid.

    In any event, in light of the fact that the Commission has found that

    the MXO contract does not meet the material price reference criterion,

    according to the Commission's Guidance, it would be unnecessary to

    evaluate whether the MXO contract meets the material liquidity

    criterion since it cannot be used alone for SPDC determination.

    ---------------------------------------------------------------------------

    \35\ In addition, ICE stated that the trades-per-day statistics

    that it provided to the Commission in its quarterly filing and which

    were cited in the Commission's October 6, 2009, Federal Register

    notice includes 2(h)(1) transactions, which were not completed on

    the electronic trading platform and should not be considered in the

    SPDC determination process. The Commission staff asked ICE to review

    the data it sent in its quarterly filings; ICE confirmed that the

    volume data it provided and which the Commission cited includes only

    transaction data executed on ICE's electronic trading platform. As

    noted above, supplemental data supplied by ICE confirmed that block

    trades are in addition to the trades that were conducted on the

    electronic platform; block trades comprise about 61 percent of all

    transactions in the MXO contract (fourth quarter of 2009).

    Commission acknowledges that the open interest information it

    provided in its October 6, 2009, Federal Register notice includes

    transactions made off the ICE platform. However, once open interest

    is created, there is no way for ICE to differentiate between ``on-

    exchange'' versus ``off-exchange'' created positions, and all such

    positions are fungible with one another and may be offset in any way

    agreeable to the position holder regardless of how the position was

    initially created.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

    For the reasons discussed above, the Commission finds that the MXO

    contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the MXO Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE MXO

    contract does not perform a significant price discovery function under

    the criteria established in section 2(h)(7) of the CEA. Specifically,

    the Commission has determined that the MXO contract does not meet the

    material price reference or material liquidity criteria at this time.

    Accordingly, the Commission is issuing the attached Order declaring

    that the MXO contract is not a SPDC.

    Issuance of this Order indicates that the Commission does not at

    this time regard ICE as a registered entity in connection with its MXO

    contract.\36\ Accordingly, with respect to its MXO contract, ICE is not

    required to comply with the obligations, requirements and timetables

    prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,

    ICE must continue to comply with the applicable reporting requirements

    for ECMs.

    ---------------------------------------------------------------------------

    \36\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    V. Related Matters

    a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \37\ imposes certain

    requirements on Federal agencies, including the Commission, in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. Certain provisions of Commission

    rule 36.3 impose new regulatory and reporting requirements on ECMs,

    resulting in information collection requirements within the meaning of

    the PRA. OMB previously has approved and assigned OMB control number

    3038-0060 to this collection of information.

    ---------------------------------------------------------------------------

    \37\ 44 U.S.C. 3507(d).

    ---------------------------------------------------------------------------

    b. Cost-Benefit Analysis

    Section 15(a) of the CEA\38\ requires the Commission to consider

    the costs and benefits of its actions before issuing an order under the

    Act. By its terms, section 15(a) does not require the Commission to

    quantify the costs and benefits of an order or to determine whether the

    benefits of the order outweigh its costs; rather, it requires that the

    Commission ``consider'' the costs and benefits of its actions. Section

    15(a) further specifies that the costs and benefits shall be evaluated

    in light of five broad areas of market and public concern: (1)

    Protection of market participants and the public; (2) efficiency,

    competitiveness and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular

    order is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or accomplish any of the purposes of

    the Act.

    ---------------------------------------------------------------------------

    \38\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    When a futures contract begins to serve a significant price

    discovery function, that contract, and the ECM on which it is traded,

    warrants increased oversight to deter and prevent price manipulation or

    other disruptions to market integrity, both on the ECM itself and in

    any related futures contracts trading on DCMs. An Order finding that a

    particular contract is a SPDC triggers this increased oversight and

    imposes obligations on the ECM calculated to accomplish this goal. The

    increased oversight engendered by the issue of a SPDC Order increases

    transparency and helps to ensure fair competition among ECMs and DCMs

    trading similar products and competing for the same business. Moreover,

    the ECM on which the SPDC is traded must assume, with respect to that

    contract, all the responsibilities and obligations of a registered

    entity under the CEA and Commission regulations. Additionally, the ECM

    must comply with nine core principles established by section 2(h)(7) of

    the Act--including the obligation to establish position limits and/or

    accountability standards for the SPDC. Section 4(i) of the CEA

    authorizes the Commission to require reports for SPDCs listed on ECMs.

    These increased responsibilities, along with the CFTC's increased

    regulatory authority, subject the ECM's risk management practices to

    the Commission's supervision and oversight and generally enhance the

    financial integrity of the markets.

    The Commission has concluded that the MPD and MXO contracts, which

    are the subject of the attached Orders, are not SPDCs; accordingly, the

    Commission's Orders impose no additional costs and no additional

    statutorily or regulatory mandated responsibilities on the ECM.

    c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \39\ requires that

    agencies consider the impact of their rules on small businesses. The

    requirements of CEA section 2(h)(7) and the Part 36 rules affect ECMs.

    The Commission previously has determined that ECMs are not small

    entities for purposes of the RFA.\40\ Accordingly, the Chairman, on

    behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

    that these Orders, taken in connection with section 2(h)(7) of the Act

    and the Part 36 rules, will not have a significant impact on a

    substantial number of small entities.

    ---------------------------------------------------------------------------

    \39\ 5 U.S.C. 601 et seq.

    \40\ 66 FR 42256, 42268 (Aug. 10, 2001).

    ---------------------------------------------------------------------------

    VI. Orders

    a. Order Relating to the Mid-C Financial Peak Daily Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the Mid-C Financial Peak Daily

    contract, traded on the IntercontinentalExchange, Inc., does not at

    this time satisfy the material price preference or material liquidity

    criteria for significant price discovery contracts. Consistent with

    this determination, the IntercontinentalExchange, Inc., is not

    considered a registered entity \41\ with respect to the Mid-C Financial

    Peak Daily contract and is not subject to the provisions of the

    Commodity Exchange Act applicable to registered entities. Further, the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4) governing core principle compliance by the

    IntercontinentalExchange, Inc., are not applicable to the Mid-C

    Financial Peak Daily contract with the issuance of this Order.

    ---------------------------------------------------------------------------

    \41\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the

    [[Page 38487]]

    Commission by the IntercontinentalExchange, Inc., dated July 27, 2009,

    and March 24, 2010, and other supporting material. Any material change

    or omissions in the facts and circumstances pursuant to which this

    order is granted might require the Commission to reconsider its current

    determination that the Mid-C Financial Peak Daily contract is not a

    significant price discovery contract. Additionally, to the extent that

    it continues to rely upon the exemption in Section 2(h)(3) of the Act,

    the IntercontinentalExchange, Inc., must continue to comply with all of

    the applicable requirements of Section 2(h)(3) and Commission

    Regulation 36.3.

    b. Order Relating to the Mid-C Financial Off-Peak Daily Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the Mid-C Financial Off-Peak Daily

    contract, traded on the IntercontinentalExchange, Inc., does not at

    this time satisfy the material price reference or material liquidity

    criteria for significant price discovery contracts. Consistent with

    this determination, the IntercontinentalExchange, Inc., is not

    considered a registered entity \42\ with respect to the Mid-C Financial

    Off-Peak Daily contract and is not subject to the provisions of the

    Commodity Exchange Act applicable to registered entities. Further, the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4) governing core principle compliance by the

    IntercontinentalExchange, Inc., are not applicable to the Mid-C

    Financial Off-Peak Daily contract with the issuance of this Order.

    ---------------------------------------------------------------------------

    \42\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the IntercontinentalExchange, Inc., July 27, 2009, and March 24,

    2009, and other supporting material. Any material change or omissions

    in the facts and circumstances pursuant to which this order is granted

    might require the Commission to reconsider its current determination

    that the Mid-C Financial Off-Peak Daily contract is not a significant

    price discovery contract. Additionally, to the extent that it continues

    to rely upon the exemption in Section 2(h)(3) of the Act, the

    IntercontinentalExchange, Inc., must continue to comply with all of the

    applicable requirements of Section 2(h)(3) and Commission Regulation

    36.3.

    Issued in Washington, DC on June 25, 2010, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-16206 Filed 7-1-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: July 2, 2010



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